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Follow-up: 20% Tax Rate on Virtual Currency Brokering in China?

We reported earlier about the 20% tax rate legislation on virtual currency transactions in China. Shanghai Daily has now published an article concerning this legislation and about the fall-out that followed.

“ASSET prices in the Chinese cyber world rose in the past week and the debate on the tax collection of virtual property trade continued to be hot“

The first and foremost consequence was the increased prices of virtual assets (as I predicted in the earlier post). This, of course, is in no way surprising, but it is interesting to see how the taxation in the end distributes between the sellers and the buyers.

– “Trade volume is at normal levels but the average price rose slightly in the past two weeks “

If the sellers in fact are able to raise prices according to the full tax rate – 20%, and the amount of sold products did not change, then the whole tax burden would be on the buyers. Probably, though, the amount of bought products would decline and the sellers would, at least, be indirectly affected by declined revenues. On the other hand, if sellers are not able to raise prices at all, they will bear the whole tax burden. Probably, though, the tax burden will distribute with some rate between the seller and the buyer -side. More about these mechanics here.

“After individuals gain income through virtual currency transactions, they should go to the tax department to pay personal income tax within seven days of the day after the transactions. For those who can provide proof of the original value of the property, they will be charged 20 percent of their profits and for those who cannot, they will be charged at three percent of the total value of the transaction.“

According to Shanghai Daily game operators support the legislation. No wonder they support it as it drives secondary market brokers into a tighter spot and makes buying assets from the operators more favorable. In the case of operators who are willing to prohibit secondary market transactions, this comes as good news as well.

After the legislation there has been some discussion about what actually gets taxed. One interpretation is that all transactions, be it virtual-to-virtual or virtual-to-real money get taxed. The other interpretation is that only virtual-to-real money transactions are taxed. In my opinion, the original announcement nor the news articles do not explicitly express whether virtual-to-virtual transactions are being taxed, although some news sites have further gone stating this being the case (e.g. Massively). For example, Steven Davis at PlayNoEvil suspects otherwise.